Small-company growth mutual funds are the most aggressive,
broadly based domestic equity funds. Typically, they invest in
rapidly growing companies in newer industries. They have a
reputation for volatility. But, over the long-term, with the right
stocks, their potential can be huge.

Some of these funds are highly concentrated, some widely
diversified; some focus on the fastest-growing companies, others on
those that are likely to grow more steadily; some buy and sell
rapidly, others hold on for the long haul. From all this diversity,
Morningstar Inc. recently selected Baron Asset Fund as its top pick
among the 69 funds it tracked in this category.

The fund won its spot by being ranked in the top five funds of
its type for the past five calendar years for both the highest
returns and the lowest risk. In those five years, the fund had a
total return of 149 percent, according to Lipper Analytical
Services, compared with 104 percent for similar funds.

"We do our own research," portfolio manager Ron Baron
explains. "We don't wait for others to tell us what is a
great company." Baron sets out to buy what he calls unique,
lesser- known or misperceived companies, though only if offered at
good prices.

When the fund buys, it has high ambitions: Its goal is to buy
stocks with the potential to provide a return of at least 50
percent within two years. It doesn't plan to sell at the end of
that time, however; instead, its aim is to go on growing with
successful companies. According to Morningstar, the portfolio's
annual turnover in the past three years has averaged only 35
percent compared with 115 percent for its peers.

The fund finds that the long holding period provides residual
benefits by enabling it to know company management well. And it
pays a lot of attention to the quality of those managers. It looks
for entrepreneurs who worry about all aspects of their
companies' activities. One clue, Baron says, is how the owners
relate to employees. "If an executive doesn't treat his
employees well, it's not likely those employees will treat the
firm's customers well," he says.

But even good managers can't do what Baron Asset wants if
they're in a deteriorating environment. Therefore, the fund
seeks to ally itself with investments in favorable climates, such
as growing health-care, education and financial services
markets.

Baron invests relatively little in technology, which is unusual
for a small-company growth fund. Baron thinks change in technology
is so rapid that investors holding for long periods may find
themselves invested in a company and industry so altered, the
original advantage has vanished.

The fund also avoids mature industries, many of which are
cyclical or fiercely competitive, such as steel, tobacco and
railroads. The fund looks for industries in which our children are
likely to find jobs and shuns those that employed our parents or
grandparents.

Having done its research, the fund is willing to make a large
commitment to a smaller number of stocks. At a recent count, 40
percent of its assets were in 10 stocks and 20 percent in just
three: Charles Schwab & Co. Inc.; Manor Care Inc., a
health-care company; and Choice Hotels International Inc. A
portfolio like this can obviously drop sharply, either in a general
market decline or if specific companies fail to perform as
expected. In 1990, the fund lost 18 percent, for instance.
Remember, the low-risk scores noted by Morningstar are reassuring,
but the past is not the future.

The best defense for the long term, says Baron, lies in its
company selection method, which assesses value as much as growth.
So far, the strategy has worked unusually well.

At A Glance

Fund name: Baron Asset Fund

Managed by: BAMCO,

New York City

Total assets: $2 billion

One-year return: 14%*

Five-year return: 24.2%*

Ten-year return: 17.6%*

Sales fee: Annual fee of .25%

Management fee: 1%

Phone: (800) 99-BARON

Figures are as of June 30

Reg Green edits Mutual Fund News Service, a mutual fund
newsletter. The above opinions are those of the author and not of
Entrepreneuer. Past performance is no guarantee of future
returns.